Alternative Ways to Protect Trade Secrets Given the Uncertainty Surrounding Noncompete Agreements

Trade secrets can be a critical component of a company's intellectual property portfolio. They are confidential information that is not generally known or easily discoverable by others that provide businesses with a competitive advantage. Common examples of trade secrets include recipes or formulas, processes, data, software code, customer lists or business plans. A company may opt not to file for patent protection for their innovations, and instead maintain them as trade secrets, so that their proprietary methods or processes are not publicly disclosed through the patent filing process.

Some companies rely exclusively on noncompete agreements with their employees and contractors to protect their valuable trade secrets and other intellectual property. However, each state has its own laws governing the enforceability of noncompete agreements. Many states, like Louisiana, strongly disfavor them. In Louisiana, “[e]very contract or agreement,” which restrains anyone “from exercising a lawful profession, trade, or business of any kind . . . shall be null and void” unless the agreement fits into one of the limited exceptions to the general ban. Moreover, the Federal Trade Commission recently announced a proposed nationwide rule barring employers from entering noncompete clauses with workers.

With the current uncertainty surrounding noncompete agreements, many companies are exploring different ways to protect their valuable intellectual property. Among the alternatives to noncompete agreements that can be used to protect trade secrets are:

1. Nondisclosure agreements: Require employees or contractors to keep specific information confidential and not disclose it to others. When these agreements are carefully tailored and seek to protect proprietary information rather than prevent competition, they are more likely to be found enforceable. 

2. Limited use agreements: Allow employees or contractors to use trade secrets for a specific purpose but prohibit them from using it for any other purpose or disclosing it to others.

3. Limited noncompete agreements: Because noncompete agreements are disfavored in Louisiana and other states, some employers might find the use of limited noncompetes beneficial. For instance, some employers may require employees to inform them if, upon termination of their employment, they begin work with a direct competitor within a set number of years. Upon receiving such notice, the old employer can then send a letter to the new employer informing it of the former employees’ ongoing confidentiality obligations. This could reduce the risk that its confidential information will be misused in the new workplace.

4. The Defend Trade Secrets Act (DTSA): The DTSA, and similar state law equivalents, provides a remedy for owners of trade secret information to sue in federal court for its misappropriation. The DTSA also allows for the recovery of attorneys’ fees if the misappropriation has been in “bad faith.”

5. Encryption and security measures: Implementing secure methods for storing and transmitting trade secret information can help prevent unauthorized access or theft from third parties.

6. Internal protection policies: These policies can define the scope of trade secrets held by the company and provide guidelines for employees and contractors to protect them. Efforts to protect trade secret information will also help demonstrate that the owner has taken reasonable steps to maintain its confidentiality.

7. Timely response to breaches: If a trade secret’s confidentiality is breached, companies should move swiftly to investigate the breach and take legal action, if necessary, such as enforcing their rights under the DTSA or state law equivalents.

It is important for companies to have a comprehensive strategy in place to protect their trade secrets, including both legal and practical measures. This can help prevent the loss of valuable assets and maintain a competitive advantage in the marketplace. Contact Lindsay Calhoun or the Phelps Litigation team with any questions about protecting trade secret information.